Individual Retirement Accounts | IRA information Center

A TCU Traditional or Roth Individual Retirement Account (IRA) is a great way to save for the future.
To help you understand all of the features and benefits of an IRA, we created this information center.

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IRA Distribution Q&A

Note: The information below is designed to provide general information concerning IRA accounts. It is not intended to provide legal advice nor to be a detailed explanation of how this information may apply to your individual circumstances. For specific information, you are encouraged to consult your tax or legal professional, IRS Publication 590 for Individual Retirement Accounts, and/or the IRS website at www.irs.gov.

Can I withdraw from my IRA?

IRAs were specifically designed for individuals to save for retirement. Because of the tax breaks that are usually associated with having an IRA, any withdrawals before the age of 59-1/2 are taxed and penalized. (Principal contributions to a Roth IRA may be withdrawn tax and penalty free at any time, however, the earnings will be taxed and penalized) After the age of 59-1/2, IRS penalties no longer apply, however, depending on how the IRA is invested, term or investment based penalties may apply. Contact your financial institution for specific penalties associated with investment types.

Are there any exceptions for withdrawing from an IRA without penalty?

Yes. There are several situations in which the IRS allows for penalty free withdrawals. These are referred to as qualified distributions and are:

Distributions made on or after the date you attain age 59-1/2
Distributions made after at least five years (Roth IRAs only)
Distributions are part of a series of substantially equal periodic payments (Traditional IRAs only)
Distributions made to your beneficiary (or your estate) upon your death
Eligible medical expenses in excess of 7.5% of your adjusted gross income (Traditional IRAs only)
Medical insurance premiums for eligible unemployed individuals (Traditional IRAs only)
Qualified higher education expenses (Traditional IRAs only)
Disability distributions
Qualified first-time home-buyer distributions (up to $10,000)
Distributions paid directly to the IRS due to an IRS levy

What are the taxes when I withdraw from my IRA?

The amount of taxes that you will pay on an IRA withdrawal depend on your personal tax filing bracket and whether or not any of the contributions were non-deductible. Refer to a tax professional for specific amounts based on your personal tax liabilities.

What are the penalties if I take money out before I’m 59-1/2?

If an IRA withdrawal is made and none of the above exceptions apply, the IRS charges a 10% Federal penalty. This is in addition to the taxes that will be due for the amount that is withdrawn. In addition, most states apply a penalty as well (California is 2.5%). Also, depending on how the funds are invested, there may be term or investment penalties that apply. Contact your financial institution for penalties associated with investment types.

Can I have withholding applied to my distribution?

Yes. Federal and State (California only) withholding can be applied to any IRA withdrawal as a pre- payment of taxes and/or penalties.

What happens in the event of my death?

In the event of your death, your designated beneficiary(ies) will receive the balance in your IRA. There are several options available to your beneficiary on how the funds can be disbursed based on their relationship and age.

Am I ever required to make withdrawals?

For Roth IRAs, because contributions were not deductible and the earnings are tax free, there is no point in which you will be required to begin withdrawing the funds. However, the earnings on Traditional IRAs are tax deferred. During the tax year in which you reach the age of 72, you must begin making regular withdrawals from your IRA.

How much must I withdraw?

The minimum amount that is required to be withdrawn is based on a formula provided by using the IRS life expectancy tables. Although this calculation will provide you with the minimum requirement, you may always take out more as you need.

What if I have IRAs at multiple institutions? Can I satisfy my withdrawal requirement from one?

Yes. The IRS only requires that a certain amount be withdrawn each year so that they can tax it accordingly. As long as the amount that is withdrawn covers the aggregate minimum amount from each IRA, then one distribution can be taken. It is recommended that you notify the financial institutions involved and make them aware so they don’t force an unwanted distribution.

Can I satisfy multiple years of distributions at one time?

No. A distribution must be made from the IRA account each year. You may withdraw more than the required minimum, however, you will still be required to make another withdrawal the following year.

What if I forget to take out my required minimum?

If you do not withdraw the full required minimum distribution by the required distribution date, a penalty tax of 50% will be assessed on the amount not taken.

Will I get an IRS form each year to tell me how much I have withdrawn from my IRA?

Yes. Your financial institution will send you an IRS form 1099R by January 31st of the following year. This form should be included when filing your taxes.

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IRA Type and Eligibility Q&A

What is a Traditional IRA?

Traditional IRAs were designed to allow individuals to save for their retirement while giving them a tax break now. The idea is to give people the opportunity to relieve some tax liability during their working years and defer it until retirement when they are generally in a lower tax bracket. Contributions are generally tax-deductible depending on your income levels and tax filing status (refer to the IRA Contribution Q&A for specific limits). Contributions can be made to a Traditional IRA based on the eligibility requirements below:

IRA owner must have earned income (exceptions can be made for non-working spouses)

What is a Roth IRA?

Roth IRAs were created through the Taxpayer Relief Act of 1997 to help low and middle income people save for retirement. Contributions made to the Roth IRA are not tax deductible, however, withdrawal of the earnings are generally tax-free when taken for a qualified reason (refer to the IRA Distribution Q&A for specific qualifications). Contributions can be made to a Roth IRA, regardless of age, based on the eligibility limits listed below:

IRA owner must have earned income (exceptions can be made for non-working spouses) MAGI cannot exceed the limits set forth each year by the IRS. Please consult a tax professional for information on the current year’s limits.

Can I establish both a Traditional and a Roth IRA?

Yes. As long as the aggregate total of your contributions don’t exceed the maximum limit for the year (refer to the IRA Contribution Q&A for current limits), contributions may be split between the two IRA types. Refer to a tax professional for specific recommendations based on your individual tax needs.

What is a SEP IRA?

A SEP IRA was created as a means for small business owners to contribute to a retirement plan for their employees. The employer makes contributions to their employee’s IRA based on certain business requirements. These contributions are in addition to any personal contributions that are made to your Traditional and/or Roth IRAs. Eligibility for a SEP IRA is determined solely by the employer and regulated through IRS guidelines.

Can I convert my Traditional IRA To a Roth IRA?

Yes. This is called an IRA Conversion. The amount converted will be subject to income taxes, however, the 10% IRS penalty will not apply. (Specific rules may apply, please see your tax professional before doing a Roth Conversion).

Can I move my IRA from one institution to another?

Yes. IRAs can be moved from one institution to another as often as desired. This can be done by notifying the financial institution directly and doing a ‘Direct Transfer’ or by making a withdrawal at one institution and ‘Rolling Over’ the funds with another institution. A ‘Direct Transfer’ is a non-reportable transaction and therefore, there is usually less room for error. A ‘Rollover’ reports both the withdrawal and the contribution to the IRS and the two cancel each other out for tax purposes.

Can I invest my IRA in mutual funds?

Yes. IRAs can be invested in many different ways. Contact your tax advisor or our TFS Financial Advisors at (888) 929-6602 for more information.

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IRA Contribution Q&A

How much can I contribute to my IRA?

Contributions can be made to an IRA up to the annual contribution limit or 100% of your earned income, whichever is less. Every year, the IRS adjusts the contribution limits to keep in line with inflation and the cost of living. Please consult a tax professional for the current contribution limits for the current tax year. This is an aggregate total between any Traditional and/or Roth IRA contributions.

What are catch-up contributions?

For years, the maximum limit to contribute to an IRA was fairly low and the IRS did not adjust this amount by the cost of living each year, as they do now. The IRS, realizing that they may not have had practical limits in place, decided to allow individuals that are closer to retiring the ability to ‘catch-up’ on funding their retirement account to make up for lost retirement earnings. Therefore, until an unspecified time, the IRS allows anyone who is 50 years of age or older to contribute an additional $1000 per year.

Is there a minimum amount that I must contribute?

No. Although the IRS has set maximum yearly contribution limits, there is no minimum investment required. However, depending on how the IRA is being invested, there may be product minimum requirements set by the financial institution or Investment Company.

What is the deadline for making an IRA contribution?

Contributions to an IRA can be made up until the tax filing deadline (usually April 15th), not including extensions. Even if you have filed an extension for completing your personal taxes, you must make any contributions to your IRA before the national tax filing deadline.

Are my contributions deductible?

Contributions made to a Roth IRA are not tax deductible under any circumstance. Contributions to a Traditional IRA may be partially or fully tax deductible depending on your income level and whether or not you are covered by a qualified retirement plan through your work. The ability to deduct your contributions may change each year depending on your personal situation and may require some additional forms when filing your taxes. Refer to a tax professional for specific recommendations based on your individual tax needs.

Does it make sense to contribute to an IRA if I can’t deduct the contribution?

Even if you can’t deduct your IRA contribution, it may still make sense to contribute. The investments you make in the account will still grow tax deferred until withdrawn. Talk to a tax professional to see what options are best for you.

Can I mix deductible and non-deductible contributions together?

Yes. Because situations are always changing, there may be times in which your contribution is fully deductible and other times in which it is only partially deductible or not at all. Whether or not the contribution is deductible does not determine how it can be invested.

What if I accidentally contribute too much?

If a contribution is made in excess of the maximum limit, you must withdraw these funds as soon as the mistake is realized (be sure to tell your financial institution that this is an excess contribution withdrawal so they may report it properly to the IRS). Depending on how long the funds were on deposit before being removed will determine if there will be tax penalties involved. Refer to a tax professional for specific information.

Will I get an IRS form each year to tell me how much I contributed?

Because contributions are allowed up until the tax filing due date, your financial institution will send you an IRS form 5498 in May of the following year. This form is not required nor needed when filing your taxes.

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IRA Information Center

Questions and Answers about IRAs